To amend the Internal Revenue Code of 1986 to provide tax relief to middle income families who are struggling to pay for college, to amend the Higher Education Act of 1965 to provide significantly increased financial aid for needy students, provide universal access to postsecondary education, reduce student loan costs while improving student loan benefits, to streamline the Federal Family Education Loan Program, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

April 8, 1997

Mr. CLAY (for himself and Mr. RANGEL) introduced the following bill; which was referred to the Committee on Education and the Workforce, and in addition to the Committee on Ways and Means, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned

A BILL

To amend the Internal Revenue Code of 1986 to provide tax relief to middle income families who are struggling to pay for college, to amend the Higher Education Act of 1965 to provide significantly increased financial aid for needy students, provide universal access to postsecondary education, reduce student loan costs while improving student loan benefits, to streamline the Federal Family Education Loan Program, and for other purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the ‘Hope and Opportunity for Postsecondary Education Act of 1997’.

TITLE I--TAX PROVISIONS

SEC. 101. SHORT TITLE; AMENDMENT OF 1986 CODE.

(a) SHORT TITLE- This title may be cited as the ‘Higher Education Tax Incentive Act of 1997’.

(b) AMENDMENT OF 1986 CODE- Except as otherwise expressly provided, whenever in this title an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986.

SEC. 102. CREDIT FOR HIGHER EDUCATION EXPENSES.

(a) IN GENERAL- Subpart A of part IV of subchapter A of chapter 1 (relating to nonrefundable personal credits) is amended by inserting after section 23 the following new section:

‘SEC. 24. HIGHER EDUCATION TUITION AND FEES.

‘(a) ALLOWANCE OF CREDIT- In the case of an individual, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year the amount of qualified higher education expenses paid by the taxpayer during such taxable year for education furnished during any academic period beginning in such year.

‘(b) LIMITATIONS-

‘(1) DOLLAR LIMITATION-

‘(A) IN GENERAL- The amount allowed as a credit under subsection (a) for any taxable year with respect to the qualified higher education expenses of any 1 individual shall not exceed $1,500.

‘(B) REDUCTION FOR OTHER NONTAXABLE FEDERAL ASSISTANCE-

‘(i) IN GENERAL- If any nontaxable Federal assistance is allocable to any academic period, the dollar amount applicable under subparagraph (A) for the taxable year in which such period begins shall be reduced by the amount of such assistance.

‘(ii) NONTAXABLE FEDERAL ASSISTANCE- For purposes of clause (i), the term ‘nontaxable Federal assistance’ means any scholarship or grant provided by the Federal Government which is exempt from tax under this chapter by reason of section 117 or any other Federal law. Such term shall not include any benefit described in section 480(c)(2) of the Higher Education Act of 1965 (20 U.S.C. 1087vv(c)(2)), as in effect on the date of enactment of this section.

‘(2) CREDIT ALLOWED FOR ONLY 2 TAXABLE YEARS- No credit shall be allowed under subsection (a) for a taxable year with respect to the qualified higher education expenses of an individual unless the taxpayer elects to have this section apply with respect to such individual for such year. An election under this paragraph shall not take effect with respect to an individual for any taxable year if an election under this paragraph (by the taxpayer or any other individual) is in effect with respect to such individual for any 2 prior taxable years.

‘(3) CREDIT ALLOWED FOR YEAR ONLY IF INDIVIDUAL IS AT LEAST 1/2 TIME STUDENT FOR PORTION OF YEAR- No credit shall be allowed under subsection (a) for a taxable year with respect to the qualified higher education expenses of an individual unless such individual is an eligible student for at least one academic period which begins during such year.

‘(4) CREDIT ALLOWED ONLY FOR FIRST 2 YEARS OF POSTSECONDARY EDUCATION- No credit shall be allowed under subsection (a) for a taxable year with respect to the qualified higher education

expenses of an individual if the individual has completed (before the beginning of such taxable year) the first 2 years of postsecondary education at an institution of higher education.

‘(c) LIMITATION BASED ON MODIFIED ADJUSTED GROSS INCOME-

‘(1) IN GENERAL- The amount which would (but for this subsection) be taken into account under subsection (a) for the taxable year shall be reduced (but not below zero) by the amount determined under paragraph (2).

‘(2) AMOUNT OF REDUCTION- The amount determined under this paragraph is the amount which bears the same ratio to the amount which would be so taken into account as--

‘(A) the excess of--

‘(i) the taxpayer’s modified adjusted gross income for such taxable year, over

‘(ii) $50,000 ($80,000 in the case of a joint return), bears to

‘(B) $20,000.

‘(3) MODIFIED ADJUSTED GROSS INCOME- The term ‘modified adjusted gross income’ means the adjusted gross income of the taxpayer for the taxable year--

‘(A) determined without regard to section 221, and

‘(B) increased by any amount excluded from gross income under section 911, 931, or 933.

‘(d) DEFINITIONS- For purposes of this section--

‘(1) QUALIFIED HIGHER EDUCATION EXPENSES-

‘(A) IN GENERAL- The term ‘qualified higher education expenses’ means tuition and fees required for the enrollment or attendance of--

‘(i) the taxpayer,

‘(ii) the taxpayer’s spouse, or

‘(iii) any dependent of the taxpayer with respect to whom the taxpayer is allowed a deduction under section 151,

at an institution of higher education.

‘(B) EXCEPTION FOR EDUCATION INVOLVING SPORTS, ETC- Such term does not include expenses with respect to any course or other education involving sports, games, or hobbies, unless such course or other education is part of the individual’s degree program.

‘(C) EXCEPTION FOR NONACADEMIC FEES- Such term does not include student activity fees, athletic fees, insurance expenses, or other expenses unrelated to an individual’s academic course of instruction.

‘(2) INSTITUTION OF HIGHER EDUCATION- The term ‘institution of higher education’ means an institution--

‘(A) which is described in section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088), as in effect on the date of the enactment of this section, and

‘(B) which is eligible to participate in a program under title IV of such Act.

‘(3) ELIGIBLE STUDENT- The term ‘eligible student’ means, with respect to any academic period, a student who--

‘(A) meets the requirements of section 484(a)(1) of the Higher Education Act of 1965 (20 U.S.C. 1091(a)(1)), as in effect on the date of the enactment of this section, and

‘(B) is carrying at least 1/2 the normal full-time work load for the course of study the student is pursuing.

‘(4) OTHER TERMS RELATING TO THE HIGHER EDUCATION ACT- The following terms shall have the meanings prescribed in regulations under section 481(g) of the Higher Education Act of 1965 (20 U.S.C. 1088(g)), as added by the Student Financial Aid Improvements Act of 1997:

‘(A) Academic period.

‘(B) Normal full-time workload.

‘(C) First 2 years of postsecondary education.

‘(D) Qualifying grade point average.

‘(E) Job skills and new job skills.

‘(e) TREATMENT OF EXPENSES PAID BY DEPENDENT- If a deduction under section 151 with respect to an individual is allowed to another taxpayer for a taxable year beginning in the calendar year in which such individual’s taxable year begins--

‘(1) no credit shall be allowed under subsection (a) to such individual for such individual’s taxable year, and

‘(2) qualified higher education expenses paid by such individual during such individual’s taxable year shall be treated for purposes of this section as paid by such other taxpayer.

‘(f) TREATMENT OF CERTAIN PREPAYMENTS- If qualified higher education expenses are paid by the taxpayer during a taxable year for an academic period which begins during the first 3 months following such taxable year, such academic period shall be treated for purposes of this section as beginning during such taxable year.

‘(g) SPECIAL RULES-

‘(1) DENIAL OF CREDIT IF INDIVIDUAL CONVICTED OF DRUG OFFENSE- No credit shall be allowed under subsection (a) with respect to the qualified higher education expenses of an individual for any taxable year if the individual has been convicted before the end of such year of a Federal or State felony offense consisting of the possession or distribution of a controlled substance.

‘(2) DENIAL OF CREDIT IF INDIVIDUAL FAILS TO SATISFY GRADE POINT AVERAGE REQUIREMENT- If an election was in effect under this section with respect to the qualified higher education expenses of an individual for any taxable year, no credit shall be allowed under subsection (a) with respect to qualified higher education expenses of such individual for a succeeding taxable year if the individual does not have a qualifying grade point average for all courses at an institution of higher education for academic periods ending before the beginning of such succeeding taxable year. Such average shall be determined without regard to--

‘(A) courses taken while attending high school, and

‘(B) courses referred to in subsection (d)(1)(B).

‘(3) NO DOUBLE BENEFIT- No credit shall be allowed under subsection (a) for any taxable year for any expense--

‘(A) with respect to an individual if a deduction is allowed under section 221 for the taxable year for any expense with respect to such individual, or

‘(B) for which a deduction is allowed under any other provision of this chapter.

‘(4) IDENTIFICATION REQUIREMENT- No credit shall be allowed under subsection (a) to a taxpayer with respect to the qualified higher education expenses of an individual unless the taxpayer includes the name and taxpayer identification number of such individual on the return of tax for the taxable year.

‘(5) ADJUSTMENT FOR CERTAIN SCHOLARSHIPS- The amount of qualified higher education expenses otherwise taken into account under subsection (a) with respect to an individual for an academic period shall be reduced (before the application of subsections (b) and (c)) by the sum of--

‘(A) any amounts paid for the benefit of such individual which are allocable to such period as--

‘(i) a qualified scholarship which is excludable from gross income under section 117,

‘(ii) an educational assistance allowance under chapter 30, 31, 32, 34, or 35 of title 38, United States Code, or under chapter 1606 of title 10, United States Code,

‘(iii) a payment which is excludable from gross income under section 127, or

‘(iv) a payment (other than a gift, bequest, devise, or inheritance within the meaning of section 102(a)) for such individual’s educational expenses, or attributable to such individual’s enrollment at an institution of higher education, which is excludable from gross income under any law of the United States, and

‘(B) the amount excludable from gross income under section 135 which is allocable to such expenses with respect to such individual for such period.

‘(6) NO CREDIT FOR MARRIED INDIVIDUALS FILING SEPARATE RETURNS- If the taxpayer is a married individual (within the meaning of section 7703), this section shall apply only if the taxpayer and the taxpayer’s spouse file a joint return for the taxable year.

‘(7) NONRESIDENT ALIENS- If the taxpayer is a nonresident alien individual for any portion of the taxable year, this section shall apply only if such individual is treated as a resident alien of the United States for purposes of this chapter by reason of an election under subsection (g) or (h) of section 6013.

‘(h) INFLATION ADJUSTMENTS-

‘(1) DOLLAR LIMITATION ON AMOUNT OF CREDIT-

‘(A) IN GENERAL- In the case of a taxable year beginning after 1997, the $1,500 amount in subsection (b)(1)(A) shall be increased by an amount equal to--

‘(i) such dollar amount, multiplied by

‘(ii) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting ‘calendar year 1996’ for ‘calendar year 1992’ in subparagraph (B) thereof.

‘(B) ROUNDING- If any amount as adjusted under subparagraph (A) is not a multiple of $50, such amount shall be rounded to the next lowest multiple of $50.

‘(2) INCOME LIMITS-

‘(A) IN GENERAL- In the case of a taxable year beginning after 2000, the $50,000 and $80,000 amounts in subsection (c)(2) and section 221(b)(2)(B)(i)(II) shall each be increased by an amount equal to--

‘(i) such dollar amount, multiplied by

‘(ii) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting ‘calendar year 1999’ for ‘calendar year 1992’ in subparagraph (B) thereof.

‘(B) ROUNDING- If any amount as adjusted under subparagraph (A) is not a multiple of $5,000, such amount shall be rounded to the next lowest multiple of $5,000.

‘(i) REGULATIONS- The Secretary may prescribe such regulations as may be necessary or appropriate to carry out this section, including regulations providing for a recapture of credit allowed under this section in cases where there is a refund in a subsequent taxable year of any amount which was taken into account in determining the amount of such credit.’

(b) EXTENSION OF PROCEDURES APPLICABLE TO MATHEMATICAL OR CLERICAL ERRORS- Paragraph (2) of section 6213(g) (relating to the definition of mathematical or clerical errors) is amended by striking ‘and’ at the end of subparagraph (G), by striking the period at the end of subparagraph (H) and inserting ‘, and’, and by inserting after subparagraph (H) the following new subparagraph:

‘(I) an omission of a correct TIN required under section 24(g)(4) or under section 221(d)(2)(A) (relating to higher education tuition and fees) to be included on a return.’

(c) RETURNS RELATING TO HIGHER EDUCATION EXPENSES-

(1) IN GENERAL- Subpart B of part III of subchapter A of chapter 61 (relating to information concerning transactions with other persons) is amended by inserting after section 6050R the following new section:

‘SEC. 6050S. RETURNS RELATING TO HIGHER EDUCATION EXPENSES.

‘(a) IN GENERAL- Any person--

‘(1) which is an institution of higher education which receives payments for qualified higher education expenses with respect to any individual for any calendar year, or

‘(2) which is engaged in a trade or business which, in the course of such trade or business makes payments during any calendar year to any individual which constitute reimbursements or refunds (or similar amounts) of qualified higher education expenses of such individual,

shall make the return described in subsection (b) with respect to the individual at such time as the Secretary may by regulations prescribe.

‘(b) FORM AND MANNER OF RETURNS- A return is described in this subsection if such return--

‘(1) is in such form as the Secretary may prescribe,

‘(2) contains--

‘(A) the name, address, and TIN of the individual with respect to whom payments described in subsection (a) were received from (or were paid to),

‘(B) the name, address, and TIN of any individual certified by the individual described in subparagraph (A) as the taxpayer who will claim the individual as a dependent for purposes of the deduction allowable under section 151 for any taxable year ending with or within the calendar year,

‘(C) the--

‘(i) aggregate amount of payments for qualified higher education expenses received with respect to the individual described in subparagraph (A) during the calendar year, and

‘(ii) aggregate amount of reimbursements or refunds (or similar amounts) paid to such individual during the calendar year,

‘(D) the aggregate amount of nontaxable Federal assistance received with respect to the individual described in subparagraph (A) during the calendar year, and

‘(E) such other information as the Secretary may prescribe.

‘(c) APPLICATION TO GOVERNMENTAL UNITS- For purposes of this section--

‘(1) a governmental unit or any agency or instrumentality thereof shall be treated as a person, and

‘(2) any return required under subsection (a) by such governmental entity shall be made by the officer or employee appropriately designated for the purpose of making such return.

‘(d) STATEMENTS TO BE FURNISHED TO INDIVIDUALS WITH RESPECT TO WHOM INFORMATION IS REQUIRED- Every person required to make a return under subsection (a) shall furnish to each individual whose name is required to be set forth in such return under subparagraph (A) or (B) of subsection (b)(2) a written statement showing--

‘(1) the name, address, and phone number of the information contact of the person required to make such return, and

‘(2) the aggregate amounts described in subparagraphs (C) and (D) of subsection (b)(2).

The written statement required under the preceding sentence shall be furnished on or before January 31 of the year following the calendar year for which the return under subsection (a) was required to be made.

‘(e) DEFINITIONS- For purposes of this section, the terms ‘institution of higher education’, ‘qualified higher education expenses’, and ‘nontaxable Federal assistance’ have the meanings given such terms by section 24.

‘(f) RETURNS WHICH WOULD BE REQUIRED TO BE MADE BY 2 OR MORE PERSONS- Except to the extent provided in regulations prescribed by the Secretary, in the case of any amount received by any person on behalf of another person, only the person first receiving such amount shall be required to make the return under subsection (a).

‘(g) REGULATIONS- The Secretary shall prescribe such regulations as may be necessary to carry out the provisions of this section. No penalties shall be imposed under section 6724 with respect to any return or statement required under this section until such time as such regulations are issued.’

(B) by striking ‘or’ at the end of the next to last subparagraph, by striking the period at the end of the last subparagraph and inserting ‘, or’, and by adding at the end the following new subparagraph:

(3) CLERICAL AMENDMENT- The table of sections for subpart B of part III of subchapter A of chapter 61 is amended by inserting after the item relating to section 6050R the following new item:

‘Sec. 6050S. Returns relating to higher education expenses.’

(d) CLERICAL AMENDMENT- The table of sections for subpart A of part IV of subchapter A of chapter 1 is amended by inserting after the item relating to section 23 the following new item:

‘Sec. 24. Higher education tuition and fees.’

(e) EFFECTIVE DATE; SUNSET-

(1) PURPOSE- The President’s budget produces balance in fiscal year 2002 under Office of Management and Budget assumptions, including the permanent changes in law providing the tax reduction set forth in the preceding portions of this section. The President’s budget also includes a mechanism to guarantee balance under Congressional Budget Office assumptions. As a part of that mechanism, the following provision sunsetting the tax reduction is included, as well as specific expedited procedures for reinstatement of the reduction to the extent that Office of Management and Budget assumptions prove correct.

(2) EFFECTIVE DATE- The amendments made by this section shall apply to expenses paid after December 31, 1996 (in taxable years ending after such date), for education furnished in academic periods beginning after June 30, 1997, except that no credit shall be allowed under section 24 of the Internal Revenue Code of 1986 for taxable years beginning after December 31, 2000.

SEC. 103. DEDUCTION FOR HIGHER EDUCATION EXPENSES.

(a) DEDUCTION ALLOWED- Part VII of subchapter B of chapter 1 (relating to additional itemized deductions for individuals) is amended by redesignating section 221 as section 222 and by inserting after section 220 the following new section:

‘SEC. 221. HIGHER EDUCATION TUITION AND FEES.

‘(a) ALLOWANCE OF DEDUCTION- In the case of an individual, there shall be allowed as a deduction the amount of qualified higher education expenses paid by the taxpayer during the taxable year for education furnished to the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer with respect to whom the taxpayer is allowed a deduction under section 151, as an eligible student at an institution of higher education during any academic period beginning in such year.

‘(b) LIMITATIONS-

‘(1) DOLLAR LIMITATION-

‘(A) IN GENERAL- The amount allowed as a deduction under subsection (a) for any taxable year shall not exceed $10,000.

‘(B) PHASE-IN- In the case of taxable years beginning in 1997 or 1998, subparagraph (A) shall be applied by substituting ‘$5,000’ for ‘$10,000’.

‘(2) LIMITATION BASED ON MODIFIED ADJUSTED GROSS INCOME-

‘(A) IN GENERAL- The amount which would (but for this paragraph) be allowed as a deduction under subsection (a) shall be reduced (but not below zero) by the amount determined under subparagraph (B).

‘(B) AMOUNT OF REDUCTION- The amount determined under this subparagraph equals the amount which bears the same ratio to the deduction (determined without regard to this paragraph) as--

‘(i) the excess of--

‘(I) the taxpayer’s modified adjusted gross income for the taxable year, over

‘(II) $50,000 ($80,000 in the case of a joint return), bears to

‘(ii) $20,000.

‘(C) MODIFIED ADJUSTED GROSS INCOME- For purposes of subparagraph (B), the term ‘modified adjusted gross income’ means the adjusted gross income of the taxpayer for the taxable year determined--

‘(i) without regard to this section and sections 911, 931, and 933, and

‘(ii) after the application of sections 86, 135, 219, and 469.

For purposes of sections 86, 135, 219, and 469, adjusted gross income shall be determined without regard to the deduction allowed under this section.

(c) CONFORMING AMENDMENT- The table of sections for part VII of subchapter B of chapter 1 is amended by striking the item relating to section 221 and inserting:

‘Sec. 221. Higher education tuition and fees.

‘Sec. 222. Cross reference.’

(d) EFFECTIVE DATE; SUNSET-

(1) PURPOSE- The President’s budget produces balance in fiscal year 2002 under Office of

Management and Budget assumptions, including the permanent changes in law providing the tax reduction set forth in the preceding portions of this section. The President’s budget also includes a mechanism to guarantee balance under Congressional Budget Office assumptions. As a part of that mechanism, the following provision sunsetting the tax reduction is included, as well as specific expedited procedures for reinstatement of the reduction to the extent that Office of Management and Budget assumptions prove correct.

(2) EFFECTIVE DATE- The amendments made by this section shall apply to expenses paid after December 31, 1996 (in taxable years ending after such date), for education furnished in academic periods beginning after June 30, 1997, except that no deduction shall be allowed under section 221 of the Internal Revenue Code of 1986 for taxable years beginning after December 31, 2000.

SEC. 104. TREATMENT OF CANCELLATION OF CERTAIN STUDENT LOANS.

(a) CERTAIN DIRECT STUDENT LOANS THE REPAYMENT OF WHICH IS INCOME CONTINGENT- Paragraph (1) of section 108(f) is amended by striking ‘any student loan if’ and all that follows and inserting ‘any student loan if--

‘(A) such discharge was pursuant to a provision of such loan under which all or part of the indebtedness of the individual would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers, or

‘(B) in the case of a loan made under part D of title IV of the Higher Education Act of 1965 which has a repayment schedule established under section 455(e)(4) of such Act (relating to income contingent repayments), such discharge is after the maximum repayment period under such loan (as prescribed under such part).’

(b) CERTAIN LOANS BY EXEMPT ORGANIZATIONS-

(1) IN GENERAL- Paragraph (2) of section 108(f) (defining student loan) is amended by striking ‘or’ at the end of subparagraphs (B) and (C) and by striking subparagraph (D) and inserting the following:

‘(D) any organization described in section 501(c)(3) and exempt from tax under section 501(a), or

‘(E) any educational organization described in section 170(b)(1)(A)(ii) pursuant to an agreement with any entity described in subparagraph (A), (B), (C), or (D) under which the funds from which the loan was made were provided to such educational organization.

The term ‘student loan’ includes any loan made by an organization described in subparagraph (D) to refinance a loan meeting the requirements of the preceding sentence.’

(2) EXCEPTION FOR DISCHARGES ON ACCOUNT OF SERVICES PERFORMED FOR CERTAIN LENDERS- Subsection (f) of section 108 is amended by adding at the end the following new paragraph:

‘(3) EXCEPTION FOR DISCHARGES ON ACCOUNT OF SERVICES PERFORMED FOR CERTAIN LENDERS- Paragraph (1) shall not apply to the discharge of a loan made by an organization described in paragraph (2)(D) (or by an organization described in paragraph (2)(E) from funds provided by an organization described in paragraph (2)(D)) if the discharge is on account of services performed for either such organization.’

(c) EFFECTIVE DATE- The amendments made by this section shall apply to discharges of indebtedness after the date of the enactment of this Act.

SEC. 105. EMPLOYER-PROVIDED EDUCATIONAL ASSISTANCE PROGRAMS.

(a) EXTENSION- Subsection (d) of section 127 (relating to exclusion for educational assistance programs) is amended to read as follows:

‘(d) TERMINATION- This section shall not apply to taxable years beginning after December 31, 2000.’

(b) REPEAL OF LIMITATION ON GRADUATE EDUCATION- The last sentence of section 127(c)(1) is amended by striking ‘, and such term also does not include any payment for, or the provision of any benefits with respect to, any graduate level course of a kind normally taken by an individual pursuing a program leading to a law, business, medical, or other advanced academic or professional degree’.

(c) EFFECTIVE DATES-

(1) EXTENSION- The amendments made by subsection (a) shall apply to taxable years beginning after December 31, 1996.

(2) GRADUATE EDUCATION- The amendment made by subsection (b) shall apply with respect to

expenses relating to courses beginning after June 30, 1996.

(3) EXPEDITED PROCEDURES- The Secretary of the Treasury shall establish expedited procedures for the refund of any overpayment of taxes imposed by the Internal Revenue Code of 1986 which is attributable to amounts excluded from gross income during 1996 or 1997 under section 127 of such Code, including procedures waiving the requirement that an employer obtain an employee’s signature where the employer demonstrates to the satisfaction of the Secretary that any refund collected by the employer on behalf of the employee will be paid to the employee.

SEC. 106. SMALL BUSINESS EDUCATIONAL ASSISTANCE CREDIT.

(a) IN GENERAL- Subpart D of part IV of subchapter A of chapter 1 (relating to business related credits) is amended by adding at the end the following new section:

‘SEC. 45D. SMALL BUSINESS EDUCATIONAL ASSISTANCE CREDIT.

‘(a) GENERAL RULE- For purposes of section 38, the small business educational assistance credit for any taxable year is an amount equal to 10 percent of the qualified educational assistance expenses of the taxpayer for the taxable year.

‘(b) QUALIFIED EDUCATIONAL ASSISTANCE EXPENSES- For purposes of this section--

‘(1) IN GENERAL- The term ‘qualified educational assistance expenses’ means any amount paid or incurred by an eligible small employer for educational assistance furnished to an employee of the employer by a person other than such employer (or an employee of such employer) under an educational assistance program described in section 127(b).

‘(2) EDUCATIONAL ASSISTANCE- The term ‘educational assistance’ has the meaning given such term by section 127(c)(1) (determined without regard to subparagraph (B) thereof).

‘(3) LIMITATIONS-

‘(A) DOLLAR LIMITATION PER EMPLOYEE- The aggregate amount which may be taken into account under paragraph (1) with respect to any employee for any taxable year shall not exceed $5,250.

‘(B) PAYMENTS TO RELATED PERSONS-

‘(i) IN GENERAL- No amount shall be taken into account under paragraph (1) if such amount is to be paid to a related person with respect to the employer.

‘(ii) RELATED PERSON- For purposes of this subparagraph, a person shall be related to the employer if--

‘(I) such person is a 5-percent owner (within the meaning of section 416(i)(1)(B)(i)) of the employer, or

‘(II) such person bears a relationship to the employer or such a 5-percent owner which is described in section 267(b) or 707(b)(1).

‘(C) TRADE OR BUSINESS- No amount shall be taken into account under paragraph (1) unless it is incurred in the active conduct of a trade or business by the taxpayer.

‘(c) ELIGIBLE SMALL EMPLOYER- For purposes of this section--

‘(1) IN GENERAL- A taxpayer shall be treated as an eligible small employer for any taxable year if the average annual gross receipts of the taxpayer for the 3-taxable year period ending with the preceding taxable year are $10,000,000 or less.

‘(2) SPECIAL RULES- Section 448(c)(3) shall apply for purposes of this subsection.

‘(d) DEFINITIONS AND SPECIAL RULES- For purposes of this section--

‘(1) DEFINITIONS- The terms ‘employee’ and ‘employer’ have the meanings given such terms by paragraphs (2) and (3) of section 127(c), respectively.

‘(2) AGGREGATION-

‘(A) IN GENERAL- All persons treated as a single employer under subsection (a) or (b) of section 52 or subsection (m) or (o) of section 414 shall be treated as a single employer.

‘(B) ALLOCATION OF CREDIT- The credit (if any) determined under this section with respect to each person described in subparagraph (A) shall be its proportionate share of the qualified educational assistance expenses giving rise to such credit.

‘(3) SHORT TAXABLE YEARS- For any taxable year having less than 12 months, the credit determined under this section shall be multiplied by a fraction, the numerator of which is the number of days in the taxable year and the denominator of which is 365.

‘(4) DISALLOWANCE OF DEDUCTION-

‘For disallowance of deduction for expenses for which credit allowable, see section 280C(d).

‘(e) TERMINATION- This section shall not apply to qualified educational assistance expenses incurred in taxable years beginning after December 31, 2000.’

(b) DISALLOWANCE OF DEDUCTIONS- Section 280C (relating to certain expenses for which credits are allowable) is amended by adding at the end the following new subsection:

‘(d) CREDIT FOR SMALL BUSINESS EDUCATIONAL ASSISTANCE EXPENSES-

‘(1) IN GENERAL- No deduction shall be allowed for that portion of the qualified educational assistance expenses (as defined in section 45D(b)) otherwise allowable as a deduction for the taxable year which is equal to the amount of the credit determined for such taxable year under section 45D.

‘(2) ELECTION OF REDUCED CREDIT-

‘(A) IN GENERAL- In the case of any taxable year for which an election is made under this paragraph--

‘(i) paragraph (1) shall not apply, and

‘(ii) the amount of the credit under section 45D(a) shall be the amount determined under subparagraph (B).

‘(B) AMOUNT OF REDUCED CREDIT- The amount of the credit determined under this subparagraph for any taxable year shall be the amount equal to the excess of--

‘(i) the amount of credit determined under section 45D(a) without regard to this paragraph, over

‘(ii) the product of--

‘(I) the amount described in clause (i), and

‘(II) the maximum rate of tax under section 11(b)(1).

‘(C) ELECTION- An election under this paragraph for any taxable year shall be made not later than the time for filing the return of tax for such year (including extensions), shall be made on such return, and shall be made in such manner as the Secretary may prescribe. Such an election, once made, shall be irrevocable.

(c) GENERAL BUSINESS CREDIT- Subsection (b) of section 38 (relating to general business credit) is amended by striking ‘plus’ at the end of paragraph (11), by striking the period at the end of paragraph (12) and inserting ‘, plus’, and by adding at the end the following new paragraph:

‘(13) the small business educational assistance credit determined under section 45D(a).’

(d) CONFORMING AMENDMENTS-

(1) NO CARRYBACK- Subsection (d) of section 39 (relating to carryback and carryforward of unused credits) is amended by adding at the end the following new paragraph:

‘(8) NO CARRYBACK OF SECTION 45D CREDIT BEFORE ENACTMENT- No portion of the unused business credit for any taxable year which is attributable to the credit determined under section 45D may be carried back to a taxable year ending before the date of the enactment of section 45D.’

(2) The table of sections for subpart D of such part IV is amended by adding at the end the following new item:

‘Sec. 45D. Small business educational assistance credit.’

(e) EFFECTIVE DATE- The amendments made by this section shall apply to education and training furnished in taxable years beginning after December 31, 1997.

TITLE II--STUDENT FINANCIAL AID PROVISIONS

SEC. 201. SHORT TITLE; REFERENCES.

(a) SHORT TITLE- This title may be cited as the ‘Student Financial Aid Improvements Act of 1997’.

(b) REFERENCES- References in this title to ‘the Act’ shall refer to the Higher Education Act of 1965 (20 U.S.C. 1001 et seq.).

PART A--PELL GRANTS

SEC. 211. PELL GRANT MAXIMUM AWARD.

Section 401(b)(2)(A) of the Act is amended by adding at the end thereof the following: ‘Except as otherwise provided in this section, in no case shall the maximum basic grant be less than $3,000.’.

PART B--STUDENT LOAN PROVISIONS

SEC. 221. MANAGEMENT AND RECOVERY OF RESERVES.

Section 422 of the Act is amended--

(1) by amending subsection (g)(1) to read as follows:

‘(1) AUTHORITY TO RECOVER FUNDS- (A) Notwithstanding any other provision of law, the reserve funds of the guaranty agencies, and any assets purchased or developed with such reserve funds, regardless of who holds or controls the reserves or assets, shall remain the property of the United States.

‘(B) The Secretary may direct the guaranty agency to require the return, to the guaranty agency or to the Secretary, of any reserve funds or assets held by, or under the control of, any other entity, that the Secretary determines are required--

‘(i) to pay the program expenses and contingent liabilities of the guaranty agency;

‘(ii) to satisfy the guaranty agency’s requirements under subsection (h); or

‘(iii) for the orderly termination of the guaranty agency’s operations and the liquidation of its assets.

‘(C) The Secretary may direct a guaranty agency, or such agency’s officers or directors, to cease any activity involving expenditure, use, or transfer of the guaranty agency’s reserve funds or assets that the Secretary determines is a misapplication, misuse, or improper expenditure of such funds or assets.’; and

(2) by adding after subsection (g) the following new subsections:

‘(h) RECALL OF RESERVES IN FISCAL YEARS 1997 THROUGH 2002; LIMITATIONS ON USE OF RESERVE FUNDS AND ASSETS- (1)(A) Notwithstanding any other provision of law, the Secretary shall, except as otherwise provided in this subsection, recall from the reserve funds held by guaranty agencies (which for purposes of this subsection shall include any reserve funds held by, or under the control of, any other entity) not less than--

‘(i) $731,000,000 in fiscal year 1998;

‘(ii) $127,000,000 in fiscal year 1999;

‘(iii) $186,000,000 in each of the fiscal years 2000 and 2001; and

‘(iv) $1,271,000,000 in fiscal year 2002.

‘(B) Funds returned to the Secretary under this subsection shall be deposited in the Treasury.

‘(C) The Secretary shall require each guaranty agency to return reserve funds under subparagraph (A) based on its proportionate share, as determined by the Secretary, of all reserve funds held by guaranty agencies as of September 30, 1996.

‘(2)(A) Within 45 days of enactment of this subsection, all reserve funds held by a guaranty agency that have not yet been recalled by the Secretary under paragraph (1) shall be transferred by the guaranty agency to a restricted account (of a type specified by the Secretary) established by the guaranty agency, and be invested in United States Government securities specified by the Secretary. The manner and timeframe in which reserve funds so invested are recalled shall be specified by the Secretary, consistent with the requirements of this subsection. Except as described in subparagraph (B), the guaranty agency shall not use the reserve funds in such account, which shall include the earnings thereon, for any purpose without the express permission of the Secretary.

‘(B)(i) In order to assist guaranty agencies in meeting program expenses, the Secretary shall permit the use of not more than an aggregate of $350,000,000 of the reserve funds held in the restricted accounts described in subparagraph (A) by guaranty agencies with agreements under section 428(c), as working capital to be used for such purposes as the Secretary may specify. The Secretary shall specify the amount of reserve funds in each guaranty agency’s restricted account that may be used as working capital, based on the guaranty agency’s proportionate share of all borrower accounts outstanding on September 30, 1996. The guaranty agency shall repay such amount to its restricted account (or returned to the Treasury, if so directed by the Secretary) by no later than September 30, 2002, or the date on which such agency’s agreement under section 428(c) ends (through resignation, expiration, or termination), whichever is earlier.

‘(ii) The guaranty agency may use the earnings from its restricted account for fiscal year 1998 to assist in meeting its operational expenses for such year.

‘(C) Nonliquid reserve fund assets, such as buildings and equipment purchased or developed by the guaranty agency with reserve funds, and any liquid assets remaining in a guaranty agency’s restricted account after the recalls in paragraph (1)(A), shall--

‘(i) remain the property of the United States;

‘(ii) be used only for such purposes as the Secretary determines are appropriate; and

‘(iii) be subject to recall by the Secretary no later than the date on which such agency’s agreement under section 428(c) ends (through resignation, expiration, or termination, as the case may be).’.

SEC. 222. REPAYMENT TERMS.

(a) Section 427 of the Act is amended--

(1) in subsection (a)(2)--

(A) in subparagraph (B), in the matter preceding clause (i), by striking ‘over a period’ through ‘nor more than 10 years’ and inserting ‘in accordance with the repayment plan selected under subsection (d),’;

(B) in subparagraph (C), at the end of the subparagraph, by striking out ‘the 10-year period described in subparagraph (B);’ and inserting the following: ‘the length of the repayment period under a repayment plan described in subsection (d);’;

(C) by striking subparagraph (F);

(D) by redesignating subparagraphs (G), (H), and (I) as subparagraphs (F), (G), and (H), respectively; and

(E) in subparagraph (G) (as redesignated by subparagraph (D)), by striking ‘the option’ through the end of the subparagraph and inserting ‘the repayment options described in subsection (d); and’;

(2) in subsection (c), by striking ‘in subsection (a)(2)(H),’ and inserting the following: ‘by a repayment plan selected by the borrower under subparagraph (C) or (D) of subsection (d)(1),’; and

(3) by adding after subsection (c) the following new subsection:

‘(d) REPAYMENT PLANS-

‘(1) DESIGN AND SELECTION- In accordance with regulations of the Secretary, the lender shall offer a borrower of a loan made under this part the plans described in this subsection for repayment of such loan, including principal and interest thereon. No plan may require a borrower to repay a loan in less than 5 years. The borrower may choose from--

‘(A) a standard repayment plan, with a fixed annual repayment amount paid over a fixed period of time, not to exceed 10 years;

‘(B) an extended repayment plan, with a fixed annual repayment amount paid over an extended period of time, not to exceed 30 years, except that the borrower shall repay annually a minimum amount determined in accordance with subsection (c);

‘(C) a graduated repayment plan, with annual repayment amounts established at 2 or more graduated levels and paid over an extended period of time, not to exceed 30 years, except that the borrower’s scheduled payments shall not be less than 50 percent, nor more than 150 percent, of what the amortized payment on the amount owed would be if the loan were repaid under the standard repayment plan; and

‘(D) an income-sensitive repayment plan, with income-sensitive repayment amounts paid over a fixed period of time, not to exceed 10 years.

‘(2) LENDER SELECTION OF OPTION IF BORROWER DOES NOT SELECT- If a borrower of a loan made under this part does not select a repayment plan described in paragraph (1), the lender shall provide the borrower with a repayment plan described in paragraph (1)(A).

‘(3) CHANGES IN SELECTIONS- The borrower of a loan made under this part may change the borrower’s selection of a repayment plan under paragraph (1), or the lender’s selection of a plan for the borrower under paragraph (2), as the case may be, under such conditions as may be prescribed by the Secretary in regulation.

‘(4) ACCELERATION PERMITTED- Under any of the plans described in this subsection, the borrower shall be entitled to accelerate, without penalty, repayment on the borrower’s loans under this part.’.

(b) Section 428(b) of the Act is amended--

(1) in paragraph (1)--

(A) in subparagraph (D), by striking clauses (i) and (ii) and the clause designation ‘(iii)’;

(II) by striking ‘the option’ through the end of the clause and inserting ‘the repayment options described in paragraph (9); and’; and

(ii) in clause (ii)--

(I) by striking ‘over a period’ through ‘nor more than 10 years’ and inserting ‘in accordance with the repayment plan selected under paragraph (9), and’; and

(II) by striking ‘of this subsection;’ at the end of clause (ii) and inserting a semicolon; and

(C) in subparagraph (L)(i), by inserting after the clause designation the following: ‘except as otherwise provided by a repayment plan selected by the borrower under paragraph (9)(A) (iii) or (iv),’; and

(2) by adding after paragraph (8) the following new paragraph:

‘(9) REPAYMENT PLANS-

‘(A) DESIGN AND SELECTION- In accordance with regulations of the Secretary, the lender shall offer a borrower of a loan made under this part the plans described in this subparagraph for repayment of such loan, including principal and interest thereon. No plan may require a borrower to repay a loan in less than 5 years. The borrower may choose from--

‘(i) a standard repayment plan, with a fixed annual repayment amount paid over a fixed period of time, not to exceed 10 years;

‘(ii) an extended repayment plan, with a fixed annual repayment amount paid over an extended period of time, not to exceed 30 years, except that the borrower shall repay annually a minimum amount determined in accordance with paragraph (2)(L);

‘(iii) a graduated repayment plan, with annual repayment amounts established at 2 or more graduated levels and paid over an extended period of time, not to exceed 30 years, except that the borrower’s scheduled payments shall not be less than 50 percent, nor more than 150 percent, of what the amortized payment on the amount owed would be if the loan were repaid under the standard repayment plan; and

‘(iv) an income-sensitive repayment plan, with income-sensitive repayment amounts paid over a fixed period of time, not to exceed 10 years.

‘(B) LENDER SELECTION OF OPTION IF BORROWER DOES NOT SELECT- If a borrower of a loan made under this part does not select a repayment plan described in subparagraph (A), the lender shall provide the borrower with a repayment plan described in subparagraph (A)(i).

‘(C) CHANGES IN SELECTIONS- The borrower of a loan made under this part may change the borrower’s selection of a repayment plan under subparagraph (A), or the lender’s selection of a plan for the borrower under subparagraph (B), as the case may be, under such conditions as may be prescribed by the Secretary in regulation.

‘(D) ACCELERATION PERMITTED- Under any of the plans described in this paragraph, the borrower shall be entitled to accelerate, without penalty, repayment on the borrower’s loans under this part.

‘(E) COMPARABLE FFEL AND DIRECT LOAN REPAYMENT PLANS- The Secretary shall ensure that the repayment plans offered to borrowers under this part are comparable, to the extent practicable and not otherwise provided in statute, to the repayment plans offered under part D.’.

(c) Section 428C of the Act is amended--

(1) in subsection (b)(3)(F), by striking ‘alternative’; and

(2) in subsection (c)--

(A) by amending paragraph (2) to read as follows:

‘(2) REPAYMENT PLANS-

‘(A) DESIGN AND SELECTION- In accordance with regulations of the Secretary, the lender shall offer a borrower of a loan made under this section the plans described in this paragraph for repayment of such loan, including principal and interest thereon. No plan may require a borrower to repay a loan in less than 5 years. The borrower may choose from--

‘(i) a standard repayment plan, with a fixed annual repayment amount paid over a fixed period of time, not to exceed 10 years;

‘(ii) an extended repayment plan, with a fixed annual repayment amount paid over an extended period of time, not to exceed 30 years, except that the borrower shall repay annually a minimum amount determined in accordance with paragraph (3);

‘(iii) a graduated repayment plan, with annual repayment amounts established at 2 or more graduated levels and paid over an extended period of time, not to exceed 30 years, except that the borrower’s scheduled payments shall not be less than 50 percent, nor more than 150 percent, of what the amortized payment on the amount owed would be if the loan were repaid under the standard repayment plan; and

‘(iv) an income-sensitive repayment plan, with income-sensitive repayment amounts paid over a fixed period of time, not to exceed 10 years.

‘(B) LENDER SELECTION OF OPTION IF BORROWER DOES NOT SELECT- If a borrower of a loan made under this section does not select a repayment plan described in subparagraph (A), the lender shall provide the borrower with a repayment plan described in subparagraph (A)(i).

‘(C) CHANGES IN SELECTIONS- The borrower of a loan made under this section may change the borrower’s selection of a repayment plan under subparagraph (A), or the lender’s selection of a plan for the borrower under subparagraph (B), as the case may be, under such conditions as may be prescribed by the Secretary in regulation.’.

(d) Section 455(d) of the Act is amended--

(1) in paragraph (1)--

(A) in subparagraph (B), by inserting after ‘an extended period of time,’ the following: ‘not to exceed 30 years,’; and

(B) in subparagraph (C), by striking ‘a fixed or extended period of time,’ and inserting the following: ‘an extended period of time, not to exceed 30 years,’; and

SEC. 223. INTEREST RATES.

(A) by inserting after the paragraph heading the subparagraph designation ‘(A)’;

(B) by redesignating subparagraphs (A) and (B) as clauses (i) and (ii), respectively;

(C) by striking ‘paragraph (1),’ and inserting ‘paragraph (1), and except as provided in subparagraph (B),’; and

(D) by adding after subparagraph (A) (as redesignated by subparagraph (A)) the following new subparagraph:

‘(B) In the case of loans made or insured under section 428 or 428H for which the first disbursement is made on or after October 1, 1997, for purposes of paragraph (1), the rate determined under this paragraph shall, during any 12-month period beginning on July 1 and ending on June 30, be determined on the preceding June 1 and be equal to the bond equivalent rate of the securities with a comparable maturity, as established by the Secretary, except that such rate shall not exceed 8.25 percent.’;

(3) in subsection (i)(7)(B), by adding at the end the following: ‘Notwithstanding any other provision of law, the interest rate determined under this subparagraph shall be used solely to determine the rebate of excess interest required by this paragraph and shall not be used to calculate or pay special allowances under section 438.’.

(b) Section 455(b) of the Act is amended--

(1) in paragraph (2)(B)--

(A) by redesignating clauses (i) and (ii) as subclauses (I) and (II), respectively;

(B) by inserting after the subparagraph heading the clause designation ‘(i)’;

(C) by striking ‘subparagraph (A),’ and inserting ‘subparagraph (A) and except as provided in clause (ii),’; and

(D) by adding after clause (i) (as redesignated by subparagraph (B)) the following new clause:

‘(ii) In the case of Federal Direct Stafford/Ford Loans or Federal Direct Unsubsidized Stafford/Ford Loans for which the first disbursement is made on or after October 1, 1997, for purposes of subparagraph (A), the rate determined under this subparagraph shall, during any 12-month period beginning on July 1 and ending on June 30, be determined on the preceding June 1 and be equal to the bond equivalent rate of the securities with a comparable maturity, as established by the Secretary, except that such rate shall not exceed 8.25 percent.’;

(2) in paragraph (3)--

(A) by striking ‘and (2),’ and inserting ‘, and except as provided in paragraph (2),’; and

(B) by striking ‘made on or after July 1, 1998,’ and inserting ‘for which the first disbursement is made on or after October 1, 1997,’; and

SEC. 224. LENDER AND HOLDER RISK SHARING.

Section 428(b)(1)(G) of the Act is amended by striking ‘not less than 98 percent’ and inserting ‘95 percent’.

SEC. 225. FEES AND INSURANCE PREMIUMS.

(a) Section 428(b)(1)(H) of the Act is amended--

(1) by inserting the clause designation ‘(i)’ following the subparagraph designation;

(2) by striking ‘the loan,’ and inserting ‘any loan made under section 428 or 428B before July 1, 1998,’; and

(3) after clause (i) (as redesignated by paragraph (1)), by adding ‘and’ and the following new clause:

‘(ii) provides that no insurance premiums shall be charged to the borrower of any loan made under section 428 or 428B on or after July 1, 1998;’.

(b) Section 428H(h) of the Act is amended--

(1) by inserting the paragraph designation ‘(1)’ following the subsection heading;

(2) by striking ‘under this section’ and inserting ‘of a loan made under this section made before July 1, 1998’; and

(3) by adding at the end of paragraph (1) (as redesignated by paragraph (1)) the following new paragraph:

‘(2) No insurance premium may be charged to the borrower on any loan made under this section made on or after July 1, 1998.’.

(c) Section 438(c) of the Act is amended--

(1) in paragraph (2), by striking ‘paragraph (6)’ and inserting ‘paragraphs (6) and (8)’; and

(2) by adding after paragraph (7) the following new paragraph:

‘(8) ORIGINATION FEE ON SUBSIDIZED LOANS ON OR AFTER JULY 1, 1998- In the case of any loan made or insured under section 428 on or after July 1, 1998, paragraph (2) shall be applied by substituting ‘2.0 percent’ for ‘3.0 percent’.’.

(d) Section 455(c) of the Act is amended--

(1) by striking ‘The Secretary’ and inserting ‘(1) For loans made under this part before July 1, 1998, the Secretary’;

(2) by striking ‘of a loan made under this part’; and

(3) by adding at the end thereof the following new paragraph:

‘(2) For loans made under this part on or after July 1, 1998, the Secretary shall charge the borrower an origination fee of--

‘(A) 2.0 percent of the principal amount of the loan, in the case of Federal Direct Stafford/Ford Loans; or

‘(B) 3.0 percent of the principal amount of the loan, in the case of Federal Direct Unsubsidized Stafford/Ford Loans or Federal Direct PLUS Loans.’.

SEC. 226. FUNCTIONS OF GUARANTY AGENCIES.

(a) Section 428 of the Act is further amended--

(1) in subsection (a)--

(A) in paragraph (1)(B)--

(i) in the matter preceding clause (i), by striking ‘which is insured’ and inserting ‘which, before October 1, 1997, is’; and

(ii) in clause (ii), by inserting ‘as in effect the day before the day of enactment of this section,’ after ‘subsection (b),’; and

(B) in paragraph (3)--

(i) by striking subparagraph (B); and

(ii) in subparagraph (A)--

(I) in clause (ii), by striking ‘under any’ through the end of the clause and inserting a period;

(II) by striking the subparagraph designation ‘(A)’;

(III) by redesignating clauses (i) and (ii) as subparagraphs (A) and (B), respectively; and

(IV) by redesignating subclauses (I) and (II) as clauses (i) and (ii), respectively;

(2) in subsection (b)--

(A) by amending the heading to read as follows: ‘REQUIREMENTS TO QUALIFY LOANS FOR INSURANCE AND INTEREST SUBSIDIES- ’;

(B) in paragraph (1)--

(i) by amending the heading to read as follows: ‘REQUIREMENTS- ’;

(ii) by amending the matter preceding subparagraph (A) to read as follows: ‘A loan by an eligible lender shall be insurable by the Secretary, and students who receive such loans shall be entitled to have made on their behalf the payments provided for in subsection (a), under a program of student loan insurance that--’;

(iii) by amending subparagraph (K) to read as follows:

‘(K) provides that the holder of any such loan will be required to submit to the Secretary, at such time or times and in such manner as the Secretary may prescribe, statements containing such information as may be required by regulation for the purpose of enabling the Secretary to determine the amount of the payment which must be made with respect to that loan;’;

(iv) by amending subparagraph (O) to read as follows:

‘(O) provides that, if the sale, assignment, or other transfer of a loan made under this part to another holder will result in a change in the identity of the party to whom the borrower must send subsequent payments or direct any communications concerning the loans, then--

‘(i) the transferor and the transferee shall be required, not later than 45 days from the date the transferee acquires a legally enforceable right to receive payment from the borrower on such loan, either jointly or separately to provide a notice to the borrower of--

‘(I) the sale, assignment, or other transfer;

‘(II) the identity of the transferee;

‘(III) the name and address of the party to whom subsequent payments or communications must be sent; and

‘(IV) the telephone numbers of both the transferor and the transferee; and

‘(ii) the transferee shall be required to notify the Secretary, and, upon the request of an institution of higher education, the Secretary shall notify the last such institution the student attended prior to the beginning of the repayment period of any loan made under this part, of--

‘(I) any sale, assignment, or other transfer of the loan; and

‘(II) the address and telephone number by which contact may be made with the new holder concerning repayment of the loan;

except that this subparagraph shall apply only if the borrower is in the grace period described in section 427(a)(2)(B) or 428(b)(7) or is in repayment status.’;

(v) in subparagraph (Q), by striking ‘guarantee’ and ‘428A’ and inserting ‘insurance’ and ‘428H’, respectively;

(vi) by amending subparagraph (R) to read as follows:

‘(R) provides for the making of such reports, in such form and containing such information, including financial information, as the Secretary may reasonably require to carry out the Secretary’s functions under this part and protect the financial interest of the United States, and for keeping such records and for affording such access thereto as the Secretary may find necessary to ensure the correctness and verification of such reports;’;

(vii) by amending subparagraph (S) to read as follows:

‘(S) provides that a lender shall pay a default prevention fee in accordance with subsection (g);’;

(viii) in subparagraph (T)--

(I) in clause (i), by inserting ‘, by the guaranty agency, in accordance with regulations prescribed by the Secretary,’ after ‘limitation’; and

(II) in clause (ii)--

(aa) in the matter preceding subclause (I), by inserting ‘, in accordance with regulations prescribed by the Secretary,’ after ‘institution’;

‘(i) for such additional criteria concerning the eligibility of lenders described in section 435(d)(1) as may be permitted by the Secretary; and

‘(ii) an assurance that the guaranty agency will report to the Secretary concerning changes in criteria under clause (i), including any procedures in effect under such program to take emergency action, limit, suspend, or terminate lenders; and’; and

(x) by striking subparagraphs (V), (W), and (X);

(C) by amending paragraph (2) to read as follows:

‘(2) SKIP-TRACING REQUIREMENT- In the case of a default claim based on an inability to locate the borrower, a lender shall certify to the Secretary, at the time of submission of the default claim, that diligent attempts have been made to locate the borrower through the use of reasonable skip-tracing techniques in accordance with regulations prescribed by the Secretary.’;

(D) in paragraph (3)(B), by striking the parenthetical through the end of the subparagraph and inserting a period; and

(E) by striking out paragraph (5) and inserting in lieu thereof the following new paragraph:

‘(5) COMPLIANCE AUDITS- (A) Except as provided in subparagraph (B) or by the Single Audit Act Amendments of 1996, an eligible lender that originates or holds more than $5,000,000 in loans made under this title during an annual audit period shall submit to the Secretary a compliance audit for that audit period which is conducted by a qualified, independent organization or person in accordance with the Government Auditing Standards issued by

the Comptroller General, and the regulations of the Secretary.

‘(B) The Secretary may permit a lender to submit the results of an audit conducted for other purposes if the Secretary determines that such other audit results provide the same information as required under subparagraph (A).’;

(3) in subsection (c)--

(A) by amending the heading to read as follows: ‘AGREEMENTS WITH GUARANTY AGENCIES- ’

(B) in paragraph (3)--

(i) in the matter preceding subparagraph (A), by striking ‘A guaranty agreement’ and inserting ‘An agreement between the Secretary and a guaranty agency’;

(ii) in the flush left language at the end of the paragraph, by striking ‘Guaranty agencies’ and inserting ‘The Secretary’; and

(iii) by redesignating paragraph (3) as paragraph (11);

(C) by striking paragraphs (1), (2), (4), and (5);

(D) by inserting after the subsection heading the following new paragraphs:

‘(1) AUTHORITY TO ENTER INTO AGREEMENTS- (A)(i) The Secretary may enter into an agreement with a guaranty agency, under which the Secretary shall insure loans made under this section through the guaranty agency as the agent of the Secretary.

‘(ii) Any guaranty agency that had an agreement with the Secretary under section 428(b) as of the day before the date of enactment of the Student Financial Aid Improvements Act of 1997 may enter into an initial agreement with the Secretary under this subsection.

‘(iii) An agreement under this subsection shall be 5 years in duration, and may be renewed by the Secretary for successive 5-year periods.

‘(iv) The Secretary may terminate the agreement prior to its expiration in accordance with paragraph (9).

‘(2) EFFECT ON PRIOR GUARANTY AGREEMENTS AND LOAN INSURANCE BY GUARANTY AGENCIES- (A) All guaranty agreements made under this subsection as it was in effect on the day before the date of enactment of the Student Financial Aid Improvements Act of 1997 shall terminate not later than 180 days after the date of enactment of that Act.

‘(B) Notwithstanding any other provision of law--

‘(i) to the extent that a guaranty agency had insured loans under this part, loan insurance by such guaranty agency that is outstanding as of the date of the termination under subparagraph (A) shall be replaced on such date by loan insurance issued by the Secretary, and the guaranty agency shall be relieved of any further liability thereon;

‘(ii) the Secretary’s liability for any outstanding liabilities of a guaranty agency (other than outstanding loan insurance under this part), shall not exceed the fair market value of the unrestricted funds of the guaranty agency, which shall consist of--

‘(I) all accumulated earnings not otherwise placed in a restricted account in accordance with section 422(h)(2)(A); and

‘(II) any working capital that may be provided under section 422(h)(2)(B); and

‘(iii) for the first year after the date of enactment of the Student Financial Aid Improvements Act of 1997, the Secretary may specify such interim administrative measures as the Secretary determines to be necessary for the efficient transfer of the loan insurance function, and to carry out the purposes of this part.

‘(3) TERMS OF AGREEMENT- The agreement between the Secretary and a guaranty agency shall include, but not be limited to--

‘(A) provisions regarding the responsibilities of the guaranty agency for--

‘(i) administering the issuance of insurance on loans made under this section on behalf of the Secretary;

‘(ii) monitoring insurance commitments made under this section;

‘(iii) default prevention activities;

‘(iv) review of default claims made by lenders;

‘(v) payment of default claims;

‘(vi) collection of defaulted loans;

‘(vii) adoption of internal systems of accounting and auditing that are acceptable to the Secretary, and reporting the result thereof to the Secretary on a timely, accurate, and auditable basis;

‘(viii) timely and accurate collection and reporting of such other data as the Secretary may require to carry out the purposes of the programs under this title;

‘(ix) monitoring of institutions and lenders participating in the program under this part; and

‘(x) such other program functions as the Secretary may require of the guaranty agency;

‘(B) provisions regarding the fees the Secretary shall pay to the guaranty agency under the agreement, and other revenues that the guaranty agency may receive thereunder, as described in paragraphs (4) and (6);

‘(C) provisions requiring the guaranty agency to carry out its responsibilities under the agreement in accordance with paragraph (5);

‘(D) provisions regarding the use, in accordance with paragraph (10), of net revenues in excess of the guaranty agency’s need for working capital, as determined after compliance with section 422(h), for such other activities in support of postsecondary education as may be agreed to by the Secretary and the guaranty agency;

‘(E) provisions regarding such other businesses, previously purchased or developed with reserve funds, that relate to the program under this part and in which the Secretary permits the guaranty agency to engage (as determined on a case-by-case basis);

‘(F) provisions setting forth such administrative and fiscal procedures as may be necessary to protect the United States from the risk of unreasonable loss thereunder, and to ensure proper and efficient administration of the loan insurance program;

‘(G) provisions regarding the submission of the results of audits of the guaranty agency that are conducted--

‘(i) at least annually;

‘(ii) by a qualified, independent organization or person in accordance with the standards established by the Comptroller General for the audit of governmental organizations, programs, and functions; and

‘(iii) in accordance with the regulations of the Secretary;

‘(H) provisions requiring the making of such reports, in such form and containing such information, including financial information, as the Secretary may reasonably require to carry out the Secretary’s functions under this part and to protect the Federal fiscal interest, and for keeping such records and for affording such access thereto as the Secretary may find necessary or appropriate to ensure the correctness and verification of such reports;

‘(I) adequate assurances that the guaranty agency will not engage in any pattern or practice which may result in a denial of a borrower’s access to loans under this part because of the borrower’s race, sex, color, religion, national origin, age, handicapped status, income, attendance at a particular eligible institution, length of the borrower’s educational program, or the borrower’s academic year in school;

‘(J) assurances that--

‘(i) upon the request of an eligible institution, the guaranty agency shall, subject to clauses (ii) and (iii), furnish to the

institution information with respect to students (including the names and addresses of such students) who received loans made or insured under this part for attendance at the eligible institution and for whom preclaims assistance activities have been requested under subsection (l);

‘(ii) the guaranty agency shall require the payment by the institution of a reasonable fee (as determined in accordance with regulations prescribed by the Secretary) for such information; and

‘(iii) the institution may use such information only to remind students of their obligation to repay student loans and may not disseminate the information for any other purpose; and

‘(K) such other provisions as the Secretary may determine to be necessary to protect the United States from the risk of unreasonable loss and to promote the purposes of this part.

‘(4) FEES AND OTHER REVENUES- (A)(i) The Secretary shall pay to a guaranty agency with an agreement under this subsection the following uniform fees:

‘(I) a 1-time issuance fee for each new loan made under this part that is insured by the Secretary through the guaranty agency; and

‘(II) an annual maintenance fee for each active borrower account.

‘(ii) The fees described in clause (i) shall be paid on a quarterly basis, from the funds available under section 458(a), in such amount as the Secretary determines, for all guaranty agencies with agreements under this subsection.

‘(B) A guaranty agency with an agreement under this subsection also may receive revenues derived from--

‘(i) a default prevention fee paid by lenders in accordance with subsection (g);

‘(ii) the collection retention allowance under paragraph (6);

‘(iii) the interest earned on working capital provided under section 422(h);

‘(iv) such other businesses, previously purchased or developed with reserve funds, that relate to the program under this part and in which the Secretary permits the guaranty agency to engage (as determined on a case-by-case basis); and

‘(v) such other fees as may be authorized under this part.

‘(5) PERFORMANCE REQUIREMENTS- (A) A guaranty agency with an agreement under this subsection shall carry out its responsibilities thereunder in accordance with such measurable performance-based standards as the Secretary may specify, and shall submit timely and accurate data to the Secretary in support of its performance.

‘(B) The Secretary shall apply the performance standards uniformly to guaranty agencies with agreements under this subsection.

‘(C) The Secretary shall assess the performance of each guaranty agency on the basis of the audits required under paragraph (3)(G), and shall compare such guaranty agency’s performance against the performance of other such guaranty agencies and publicly disseminate such comparison.

‘(D) The Secretary may impose a fine, in accordance with the terms of the agreement, on a guaranty agency that fails to achieve a specified level of performance on 1 or more performance standards. If the guaranty agency’s failure to achieve such performance level results in a financial loss to the United States, the guaranty agency shall indemnify the Secretary for such loss.’;

(E) by amending paragraph (6) to read as follows:

‘(6) COLLECTION RETENTION ALLOWANCE-

‘(A) If, after the Secretary has paid a claim on a loan made under this title, any payments are made in discharge of the obligation incurred by the borrower with respect to such loan (including any payments of interest accruing on such loan after the payment of the default claim by the Secretary), there shall be paid over to the Secretary that portion of the payments remaining after the guaranty agency with which the Secretary has an agreement under this subsection has deducted from such payments an amount for costs related to the student loan insurance program that--

‘(i) shall be specified by the Secretary on the basis of the Secretary’s review of payments for similar services in a competitive environment; and

‘(ii) in no case shall exceed 18.5 percent of such payments (subject to subparagraph (B)).

‘(B) If, after the Secretary has paid a claim on a loan made under this title, and the liability on such loan is discharged by payment of the proceeds of a consolidation loan under this part or under part D, the guaranty agency may not deduct the amount specified in subparagraph (A), but may charge the borrower an amount specified by the Secretary and not to exceed 18.5 percent of the principal amount of the defaulted loan at the time of consolidation, to defray the guaranty agency’s collection costs on the defaulted loan to be consolidated.’;

(F) by amending paragraph (7) to read as follows:

‘(7) SECRETARY AUTHORIZED TO RENEW OR MAKE ALTERNATE AGREEMENTS- Notwithstanding any other provision of law, once the initial agreement with a guaranty agency entered into after the date of enactment of the Student Financial Aid Improvements Act of 1997 has ended (through its expiration, the termination of the guaranty agency agreement by the Secretary in accordance with paragraph (9), or the resignation of the guaranty agency, as the case may be), the Secretary, in his discretion, may enter into--

‘(A) another agreement with the guaranty agency;

‘(B) an alternate agreement under which the functions previously performed by the guaranty agency shall be performed by another State or private nonprofit agency with which the Secretary has an agreement under this subsection; or

‘(C) a contract under section 428E.’;

(G) by amending paragraph (9) to read as follows:

‘(9) TERMINATION OF GUARANTY AGENCY AGREEMENTS- (A) A guaranty agency’s agreement under this subsection may be ended in advance of its expiration date in accordance with subparagraph (B) or (C). If its agreement is so ended, the guaranty agency shall immediately--

‘(i) cease to be an agent of the Secretary for purposes of the program under this part; and

‘(ii) surrender all remaining liquid and nonliquid reserve funds, and assets purchased or developed with reserve funds, still held by the guaranty agency (including reserves held by, or under the control of, any other entity) to the Secretary or the Secretary’s designated agent.

‘(B) A guaranty agency’s agreement under this subsection shall be void, and the Secretary shall immediately so notify such guaranty agency, if--

‘(i) the guaranty agency fails to comply in a timely manner with the recall of reserve requirements of section 422(h);

‘(ii) the guaranty agency fails to increase the amount of funds in its unrestricted account (as measured by comparing the amount of funds in such account at the beginning and end of a year) for each of 2 years (that may or may not be consecutive) in the 5-year period of the agreement under this subsection;

‘(iii) any other agreement that the guaranty agency has with the Secretary is terminated;

‘(iv) the guaranty agency becomes insolvent or declares bankruptcy; or

‘(v) there is any legal impediment to the guaranty agency substantially performing its responsibilities under the agreement.

‘(C) The Secretary shall, after notice and opportunity for a hearing, terminate a guaranty agency that has substantially failed to achieve an acceptable level of performance under its agreement with the Secretary. A substantial performance failure under this subparagraph may include the existence of material internal control weaknesses relating to data quality in the guaranty agency’s audits for each of 2 years (that may or may not be consecutive) in the 5-year period of the agreement under this subsection.

‘(D) Notwithstanding any other provision of Federal or State law, if the Secretary has terminated or is seeking to terminate a guaranty agency’s agreement in advance of its expiration date--

‘(i) no State court may issue any order affecting the Secretary’s actions with respect to such guaranty agency;

‘(ii) any contract with respect to the administration of reserve funds held by a guaranty agency, or the administration of any assets purchased or developed with the reserve funds of the guaranty agency, that is entered into or extended by the guaranty agency, or any other party on behalf of or with the concurrence of the guaranty agency, after the date of enactment of the Student Financial Aid Improvements Act of 1997 shall provide that the contract is terminable by the Secretary upon 30 days notice to the contracting parties if the Secretary determines that such contract includes an impermissible transfer of the reserve funds or assets, or is otherwise inconsistent with the terms or purposes of this section; and

‘(iii) no provision of State law shall apply to the actions of the Secretary in terminating the operations of a guaranty agency.’; and

(H) by adding after paragraph (9) the following new paragraph:

‘(10) USE OF SURPLUS FUNDS- (A) A guaranty agency with an agreement under this subsection may retain the amount determined in accordance with subparagraph (B) for activities in support of postsecondary education that are approved by the Secretary.

‘(B)(i) A guaranty agency may retain 50 percent of its net revenues for fiscal year 1998 in excess of the guaranty agency’s need for working capital for such year, as determined after compliance with section 422(h), for approved activities.

‘(ii) A guaranty agency may retain for approved activities for fiscal year 1999 and succeeding fiscal years the lesser of--

‘(I) 50 percent of its net revenues for such year in excess of its need for working capital, as determined after compliance with section 422(h); or

‘(II) the amount of its net revenues for such year in excess of its need for working capital, as determined after compliance with section 422(h), that is equal to a uniform percentage, established annually by the Secretary, of Federal revenues received by the guaranty agency for the preceding year. In determining such percentage, the Secretary shall take into account all guaranty agencies’ revenues and costs for the preceding year to determine an adequate level of economic incentive for guaranty agencies to maximize their efficiency.’;

(4) by amending subsection (g) to read as follows:

‘(g) DEFAULT PREVENTION FEE PAID BY LENDERS- (1) An eligible lender shall pay a guaranty agency, to which such lender referred a delinquent loan, a default prevention fee of not to exceed $100 per borrower account if the guaranty agency succeeds in bringing such loan into current repayment status.

‘(2) The Secretary shall prescribe in regulations the circumstances in which a lender may obtain a refund of a default prevention fee if the borrower of a loan on which such fee was paid subsequently defaults on such loan.’; and

(5) in subsection (l)--

(A) in paragraph (1), by striking the paragraph designation and the paragraph heading; and

(B) by striking paragraph (2).

(b) Section 435(j) of the Act is amended by striking ‘section 428(b).’ and inserting ‘section 428(c).’

SEC. 227. REPEAL OF STATE SHARE OF DEFAULT COSTS.

Section 428 of the Act is further amended by striking subsection (n).

SEC. 228. CONSOLIDATION LOANS.

(a) Section 428C of the Act is further amended--

(1) in subsection (a)(3)--

(A) in subparagraph (A), by inserting ‘in an in-school period,’ after ‘for a consolidation loan is’; and

(B) in subparagraph (B), by amending clause (i) to read as follows:

‘(i) Eligible student loans received by the eligible borrower may be added to a consolidation loan during the 180-day period following the making of such consolidation loan.’;

(2) in subsection (b)(4)(C), by amending clause (ii) to read as follows:

‘(ii) provides that interest shall accrue and be paid--

‘(I) by the Secretary, in the case of a consolidation loan made before October 1, 1997, that consolidated only Federal Stafford Loans for which the student borrower received an interest subsidy under section 428;

‘(II) by the Secretary, in the case of a consolidation loan made on or after October 1, 1997, except that the Secretary shall pay such interest only on that portion of the loan that repays Federal Stafford Loans for which the student borrower received an interest subsidy under section 428; and

‘(III) by the borrower, or capitalized, in the case of a consolidation loan, or portion thereof, other than one described in subclause (I) or (II);’; and

(3) in subsection (c)--

(A) in paragraph (1)--

(i) in subparagraph (A), by striking ‘subparagraph (B) or (C).’ and inserting ‘subparagraph (B), (C), (D), or (E), and subject to subparagraph (F).’;

(ii) in subparagraph (C), by striking ‘after July 1, 1994,’ and inserting ‘after July 1, 1994 and before October 1, 1997,’; and

(iii) by adding after subparagraph (C) the following new subparagraphs:

‘(D) A consolidation loan made on or after October 1, 1997, that repays loans made under section 428 of 428H, or a combination thereof, shall bear interest at an annual rate on the unpaid principal balance of the loan that is equal to--

‘(i) the rate specified in section 427A(g), in the case of a borrower in an in-school or grace period; or

‘(ii) the rate specified in section 427A(h)(1) in all other cases.

‘(E) A consolidation loan made on or after October 1, 1997, that repays loans made under section 428B shall bear interest at an annual rate on the unpaid principal balance of the loan that is equal to the rate specified in section 427A(h)(2).

‘(F) Notwithstanding any other provision of this section, the Secretary may prescribe in regulation such procedures as may be necessary to ensure that--

‘(i) a borrower of a consolidation loan that repays a combination of loans eligible to be consolidated under this section, shall continue to receive, after consolidation, any interest subsidy benefits associated with a loan, without extending such benefits to any other loans consolidated that do not have interest subsidy benefits;

‘(ii) in the case of a consolidation loan that repays a combination of loans described in subparagraphs (D) and (E), the interest rate on such consolidation loan shall be calculated in a manner that reflects the interest rate applicable to loans made under each such subparagraph; and

‘(iii) in the case of a consolidation loan that repays a loan eligible to be consolidated under this section other than those described in subparagraphs (D) and (E), the interest rate applicable to such other loan shall be the interest rate described in subparagraph (D) if such other loan is considered by the Secretary to be subsidized, and the interest rate described in subparagraph (E) if such other loan is considered by the Secretary to be unsubsidized.’; and

(B) in paragraph (4)--

(i) by striking ‘Repayment’ and inserting ‘(A) Except as provided in subparagraph (B), repayment’; and

(ii) by adding after subparagraph (A) (as redesignated by clause (i)) the following new subparagraph:

‘(B) In the case of a consolidation loan that repays a loan made under this part for which the borrower is in an in-school period at the time the consolidation application is received, the repayment period for such consolidation loan shall commence after the completion of a grace period, as described in section 428(b)(7)(i).’.

SEC. 229. CONTRACTS WITH OTHER ENTITIES.

Part B of title IV of the Act is amended by inserting after section 428D the following new section:

‘SEC. 428E. CONTRACT AUTHORITY.

‘The Secretary may enter into 1 or more contracts to carry out any of the functions that otherwise would be carried out by a guaranty agency with an agreement under section 428(c).’.

SEC. 230. ELIGIBLE LENDER.

Section 435(d) of the Act is amended--

(1) in paragraph (1), by striking ‘(6),’ and inserting ‘(7),’; and

(2) by adding after paragraph (6) the following new paragraph:

‘(7) UNIFORM TERMS AND CONDITIONS- Subject to such exceptions as the Secretary may prescribe in regulations, the term ‘eligible lender’ shall not include any lender that offers different terms and conditions to different borrowers of the same type of loan made or insured under this part.’.

SEC. 231. SPECIAL ALLOWANCE.

Section 438 of the Act is amended--

(1) in subsection (a)(3), by striking ‘quarterly rate’ each place it appears and inserting ‘rate’; and

‘(G)(i) Notwithstanding any other provision of this section, in the case of loans made or insured under this part for which the first disbursement is made on or after October 1, 1997, the special allowance paid pursuant to this subsection shall be computed for any 12-month period beginning on July 1 and ending on June 30 by--

‘(I) determining the bond equivalent rate on the preceding June 1 of the securities with a comparable maturity, as established by the Secretary; and

‘(II) subtracting the applicable interest rate on such loans from such amount.

‘(ii) The amount of special allowance computed under clause (i) shall be paid in quarterly increments for the 3-month periods described in paragraph (1).’; and

(B) in paragraph (3), in the second sentence, by striking ‘determined for any such 3-month period shall be paid promptly after the close of such period,’ and inserting ‘calculated

under this subsection shall be paid promptly after the close of the 3-month period for which such special allowance payment is due,’.

SEC. 232. STUDENT LOAN MARKETING ASSOCIATION OFFSET FEE.

Section 439(h)(7) of the Act is amended by adding after subparagraph (C) the following new subparagraph:

‘(D) The calculation of the fee required under subparagraph (A) or (B), as the case may be, shall be determined on the basis of the principal amount of all loans (except for loans made under sections 428C, 439(o) or 439(q))--

‘(i) owned, in whole or in part, by the Association, any subsidiary of the Association, or any company, trust or other entity owned by, or controlled by, the Association; or

‘(ii) held by a trust (including by a trustee on behalf of a trust), or by any other entity in which the Association, or any subsidiary, holds more than a minimal beneficial interest (as determined by the Secretary).’.

SEC. 233. DIRECT LOAN TRANSITION FEE.

Section 452(b) of the Act is amended to read as follows:

‘(b) TRANSITION FEES- The Secretary shall pay fees to institutions of higher education (or a consortium of those institutions) with agreements under section 454(b), in the first year of their participation in the program authorized by this part, in order to compensate for costs associated with their transition to the program. The fees shall not exceed an average of $10 per borrower at all institutions receiving the fees.’.

SEC. 234. FUNDS FOR ADMINISTRATIVE EXPENSES.

Section 458(a) of the Act is amended, in the first sentence, by striking ‘$260,000,000’ through the end of the sentence and inserting the following: ‘$532,000,000 in fiscal year 1998, $610,000,000 in fiscal year 1999, $705,000,000 in fiscal year 2000, $806,000,000 in fiscal year 2001, and $904,000,000 in fiscal year 2002.’.

PART C--NEED ANALYSIS AND GENERAL PROVISIONS

SEC. 241. HOPE SCHOLARSHIP NEED ANALYSIS AMENDMENTS.

(a) CALCULATION OF AVAILABLE INCOME-

(1) Section 475 of the Act is amended--

(A) by amending subsection (c)(1)(A) to read as follows:

‘(A) the sum of--

‘(i) Federal income taxes;

‘(ii) the amount of any tax credit taken under section 24 of the Internal Revenue Code of 1986; and

‘(iii) the amount by which tax liability determined without regard to the deduction provided under section 221 of the Internal Revenue Code exceeds the amount of tax liability determined after taking such deduction into account;’; and

(B) by amending subsection (g)(2)(A) to read as follows:

‘(A) the sum of--

‘(i) Federal income taxes;

‘(ii) the amount of any tax credit taken by the student under section 24 of the Internal Revenue Code of 1986; and

‘(iii) the amount by which tax liability determined without regard to the deduction provided under section 221 of the Internal Revenue Code exceeds the amount of tax liability determined after taking such deduction into account;’.

(2) Section 476(b)(1)(A)(i) of the Act is amended to read as follows:

‘(A) the sum of--

‘(i) Federal income taxes;

‘(ii) the amount of any tax credit taken under section 24 of the Internal Revenue Code of 1986; and

‘(iii) the amount by which tax liability determined without regard to the deduction provided under section 221 of the Internal Revenue Code exceeds the amount of tax liability determined after taking such deduction into account;’.

(3) Section 477(b)(1)(A) of the Act is amended to read as follows:

‘(A) the sum of--

‘(i) Federal income taxes;

‘(ii) the amount of any tax credit taken under section 24 of the Internal Revenue Code of 1986; and

‘(iii) the amount by which tax liability determined without regard to the deduction provided under section 221 of the Internal Revenue Code exceeds the amount of tax liability determined after taking such deduction into account;’.

(b) DEFINITIONS- Section 480 of the Act is amended--

(1) in subsection (a)(2)--

(A) by striking ‘and no portion’ and inserting ‘no portion’; and

(B) by inserting after ‘(42 U.S.C. 12571 et seq.),’ the following: ‘and no portion of any tax credit taken under section 24 of the Internal Revenue Code of 1986,’;

(2) in subsection (b)--

(A) in paragraph (13), by striking ‘and’ at the end of the paragraph;

(B) by redesignating paragraph (14) as paragraph (15); and

(C) by inserting after paragraph (13) the following new paragraph:

‘(14) any tax deduction taken under section 221 of the Internal Revenue Code of 1986; and’;

(3) in subsection (e)--

(A) in paragraph (3), by striking ‘and’ at the end of the paragraph;

(B) in paragraph (4), by striking the period at the end of the paragraph and inserting ‘; and’; and

(C) by adding after paragraph (4) the following new paragraph:

‘(5) any tax credit taken under section 24 of the Internal Revenue Code of 1986; and’;

(4) in subsection (j), by adding after paragraph (3) the following new paragraph:

‘(4) Notwithstanding paragraph (1), a tax credit taken under section 24 of the Internal Revenue Code of 1986 shall not be treated as estimated financial assistance for purposes of section 471(3).’.

242. INCOME PROTECTION ALLOWANCE FOR INDEPENDENT STUDENTS WITHOUT DEPENDENTS.

(a) Section 476(b) of the Act is amended--

(1) in paragraph (1)--

(A) in subparagraph (A)--

(i) by amending clause (iv) to read as follows:

‘(iv) an income protection allowance, determined in accordance with paragraph (4);’; and

(ii) in clause (v), by striking ‘paragraph (4);’ and inserting ‘paragraph (5);’; and

(2) by redesignating paragraphs (4) and (5) as paragraphs (5) and (6), respectively; and

(3) by inserting after paragraph (3) the following new paragraph:

‘(4) INCOME PROTECTION ALLOWANCE- The income protection allowance is determined by the following table (or a successor table prescribed by the Secretary under section 478):

‘INCOME PROTECTIVE ALLOWANCE

----------------------------------------------------------

Family Size (including student) Number in College

1 2

----------------------------------------------------------

1 8,000

2 10,520 8,720’.

----------------------------------------------------------

(b) Section 478(b) of the Act is amended by striking ‘sections 475(c)(4) and 477(b)(4).’ and inserting ‘sections 475(c)(4), 476(b)(4), and 477(b)(4).’.

SEC. 243. HOPE SCHOLARSHIP DEFINITIONS.

Section 481 of the Act is amended by adding after subsection (f) the following new subsection:

‘(g) HOPE SCHOLARSHIP DEFINITIONS-

‘(1) As necessary for purposes of the tax credit provided under section 24 of the Internal Revenue Code of 1986, and the deduction provided under section 221 of such Code, the Secretary of Education shall define in regulation the following terms:

‘(A) Academic period.

‘(B) Normal full-time workload.

‘(C) First 2 years of postsecondary education.

‘(D) Qualifying grade point average.

‘(E) Job skills.

‘(F) New job skills.

‘(2) Notwithstanding any other provision of law, the regulations described in paragraph (1) shall not be subject to section 482(c).’.

PART D--EFFECTIVE DATES

SEC. 251. EFFECTIVE DATES.

(a) Except as otherwise provided in this section, the amendments made by this title shall take effect on the date of enactment of this Act.

(b) Section 211 is effective for the calculation of Pell Grant awards for award years beginning on or after July 1, 1998.

(c) Section 222 is effective for a loan made under part B or part D of title IV of the Act for which the first disbursement is made on or after October 1, 1997.

(d) Section 223(a)(3) and section 428(b)(5)(C) of the Act (as added by section 226(a)(2)(E)) are effective as if they were enacted on July 23, 1992.

(e) Sections 224, 229, and 230 take effect on October 1, 1997.

(f) Section 231 is effective for a loan made or insured under part B of title IV of the Act for which the first disbursement is made on or after October 1, 1997.

(g) Section 232 is effective as if it were enacted on August 10, 1993, but does not apply to the privatized entity that may be created as a result of the Student Loan Marketing Association Reorganization Act of 1996 (title VI of the Departments of Labor, Health and Human Services, Education and Related Agencies Appropriations Act, 1997, as enacted by section 101(e) of division A of Public Law 104-208).

(h) Section 242 is effective for determinations of need for academic years beginning on or after July 1, 1998.

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